Industry Insights

GASB Significantly Changes Pension Accounting & Reporting

August 2012
Author: Melissa Tuttle

Melissa Tuttle

Manager

Manufacturing & Distribution

Wells Fargo Center

1700 Lincoln Street, Suite 1400

Denver, CO 80203-4514

Denver
303.861.4545

In June 2012, the Governmental Accounting Standards Board (GASB) issued Statement No. 68, Accounting and Financial Reporting for Pensions, an amendment of GASB Statement No. 27. The statement amends the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, and Statement No. 50, Pension Disclosures, as they relate to government employers that account for pensions provided through trusts, or equivalent arrangements, that meet certain criteria. The statement includes accounting guidance for employers participating in single-employer and multiple-employer defined benefit pension plans, cost-sharing plans and defined contribution plans. The statement also addresses note disclosure and required supplementary information for employers whose employees are provided with defined benefit pensions through trusts. GASB 27 and 50 will remain applicable to employers whose pensions are not covered by the scope of this new statement.

GASB simultaneously issued a related statement (GASB 67) addressing plans’ accounting and financial reporting for state and local government pensions (an amendment to GASB Statement No. 25). The two new statements are closely related in many areas.

Statement No. 68 will trigger significant changes in accounting and reporting of pension benefits, including what's reported and how it’s calculated. This includes new procedures for measuring and recognizing obligations associated with pensions, pension costs and deferred outflows or inflows of resources. It also includes changes in the methods and assumptions used to project pension payments, discount projected payments to their present values and attribute those present values to periods of employee service.

The changes will require many governments to recognize a much larger pension liability than is currently being reported. Current standards are closely related to how governments fund pensions, and liabilities essentially are designed to reflect to what extent a government has complied with its policy for funding pensions. The new statement is designed to recognize pension liabilities that reflect the entire unfunded portion of pension obligations regardless of when the government intends to fund the obligations. In addition, the statement requires future pension obligations to be discounted to present value using a single discount rate that reflects both of the following:

The long-term expected rate of return on pension plan investments that are expected to be used to finance the payment of benefits, to the extent the pension plan’s fiduciary net position is projected to be sufficient to make projected benefit payments and pension plan assets are expected to be invested using a strategy to achieve that return
A yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher (or equivalent quality on another rating scale), to the extent that those conditions are not met

Current standards require the discount rate to only reflect the long-term investment expected rate of return. Because pension investments generally yield greater returns than governments’ long-term borrowing rates, the discounted net present value of pension obligations will be larger under the new statement to the extent the projected fiduciary net position will not be sufficient to cover all the projected benefit payments.

Cost-Sharing Employers

Under the new statements, a cost-sharing employer whose employees receive pensions through a trust will report a net pension asset or liability, deferred outflows or inflows of resources related to pensions and pension expense based on its proportionate share of the collective net pension liability of all employers in the plan. The share of collective net pension liability recognized by an individual employer should be based on the employer’s relationship to all employers and nonemployer contributing entities in the plan. The employer’s proportion should be consistent with how contributions are determined; the use of the long-term contribution effort of the employer is encouraged. The measurement of collective net pension liability, pension expense and other key information will follow the same standards that apply to single and agent employers. The effects of changes to an employer’s expected proportion of total employer-related contributions—as well as the effects of differences between the expected and actual proportionate share of total employer-related contributions each period—will be reported as a deferred outflow or inflow of resources and recognized in the employer’s pension expense in a systematic and rational manner over a closed period representative of the average expected remaining service lives of employees, beginning with the period of adoption. Under the current standards, governments recognize only the portion of cost-sharing pension obligations related to their annual required contributions.

Special Funding Situations

In some pension plans, an entity other than the employer government is legally responsible for contributing directly to the plan. The legal responsibility to contribute is either not dependent on a particular event or circumstance unrelated to the pension plan or dependent.

A responsibility not dependent upon an event unrelated to pensions might be a requirement to contribute a certain percentage of the employer government’s covered payroll. Under this special funding situation, the funding government legally responsible for contributing has assumed a portion of the employer government’s pension obligation as its own. Consequently, the funding government will recognize its proportionate share of the net pension asset or liability, deferred inflows or outflows of resources and pension expense under the new statement. The employer government will calculate its net pension liability and related financial statement elements, prior to the funding government’s support, but will recognize amounts net of the funding government’s proportionate share. The employer government will recognize revenue as well as additional pension expense equal to the funding government’s support.

On the other hand, funding dependent on an event unrelated to the pension plan will be accounted for in a manner similar to grants. The recipient government will recognize the contribution from the other government as revenue. The funding government will recognize the contribution as an expense, but not as a pension expense.

Summary of Significant Changes

Under the current guidance, single and agent employers are already including certain note disclosures in the government’s financial statements and recognizing pension cost equal to the actuarial calculation of the employer’s annual required contribution adjusted by the net pension obligation for past under- or over-contributions. As these employers are already recognizing and measuring a pension cost and a pension liability based on an actuarial valuation, the anticipated impact of the new statement on these employers should be less than the impact on cost-sharing employers. Although the impact is anticipated to be less on single and agent employers, all employers need to comply with the relevant requirements in the new statement, such as using a single discount rate, including ad hoc cost-of-living adjustments (COLAs) that are substantively automatic, and using the entry age actuarial cost method.

Below is a summary of selected significant differences between the current and new GASB guidance for accounting and financial reporting of cost-sharing multiple-employer defined pension benefits:

Current	New (GASB 68)	Implication
Pension expense is based on contributions that are made (pay-as-you-go basis) or based on a contractually required amount, which can be determined either by statute, by contract or on an actuarially determined basis.	The following inputs, unless noted otherwise, will be included in pension expense in the current measurement period: Employees’ service cost attributed to the current period in the actuarial valuation Interest on total pension liability (TPL) Projected earnings on plan investments For all employees (including active and inactive employees), changes in TPL due to changes in benefit terms Effects of differences between expected and actual experience with regard to economic and demographic factors and the effects of changes of assumptions should be recognized as follows: Effects related to the TPL of all employees (including active and inactive employees), should be recognized as a deferred outflow or inflow of resources and recognized in pension expense based on the average expected remaining service life of all employees Difference between actual investment earnings and projected earnings should be recognized as follows: Differences will be deferred and recognized as expense over a five-year period beginning in the period in which the difference occurred In general, all other changes should be included in expense in the period of change	Earlier recognition of pension expense Increased comparability of reported pension information Recognition of liability and expense as benefits earned by employees
A government sponsor only reports a liability to a pension plan if the government sponsor’s contribution to the plan is less than the contractually required amount. This method does not take into account when benefits are earned (when service is provided by employees).	TPL is the portion of the actuarial present value of projected benefit payments that is attributed to past periods of employee services. The cost-sharing employer is responsible for a proportionate share of the collective TPL not covered by pension assets, which is an unfunded obligation, and the entity should report its portion of the amount as a net pension liability (NPL) on the statement of net position. NPL is calculated as TPL less the plan’s fiduciary net position. Other government liabilities to a pension plan, such as contributions due but not yet paid, will be reported separately from the NPL.	The addition of this long-term liability to the statement of net position will reduce unrestricted net position. Cost-sharing entities will have to calculate their portion of NPL and record NPL and pension expense as well as disclose plan information.
Actuarial valuation is not required by GASB.	The TPL needs to be determined as of the measurement date (a date no earlier than the end of the employer’s prior fiscal year, consistently applied from period to period) and an actuarial valuation must be completed at least biennially. The measurement date of the TPL can be from either an actuarial valuation as of the measurement date or from updated procedures rolling forward amounts from an actuarial valuation as of a date no more than 30 months and one day earlier than the employer’s most recent fiscal year-end. Employer contributions made subsequent to the measurement date of the NPL and before the end of the employer’s reporting period should be reported as a deferred outflow of resources.	Newly required by GASB, although employers might have already been using this method.
Although actuarial valuations are not required by GASB, if a pension plan used actuarial valuations, in practice, the long-term rate of return on assets is used for the discount rate.	As long as plan assets are projected to be sufficient to make projected benefit payments, governments will discount projected benefit payments using the long-term expected rate of return. If plan assets are projected not to be available to be invested long-term and, therefore insufficient for paying benefits, then governments will need to incorporate into the discount rate a 20-year, high-quality, tax-exempt general obligation municipal bond rate to the extent projected benefits are unfunded.	As current tax-exempt general obligation municipal bond rates are low and projected benefit payments are discounted using a rate that includes this rate, the actuarial present value will be greater and the net pension liability larger.
Although actuarial valuations are not required by GASB, in general, if a pension plan used actuarial valuations, only automatic cost-of-living adjustments (COLAs) were typically included in liability and expense calculations.	Automatic COLAs and ad hoc COLAs that are substantively automatic are included in the calculation.	This will increase NPL.
If an actuarial valuation was used, a choice of various actuarial methods was allowed.	The only actuarial method allowed to allocate the discounted present value over a period will be the entry age actuarial cost method. Attribution of the present value of benefit payments should be done as a level percentage of projected payroll.	This will increase comparability of reported pension information.
Note disclosures currently include required contribution rates of the employer in dollars and the percentage of that amount contributed for the current year and each of the two preceding years, and how the contractually required contribution rate is determined, or that the cost-sharing plan is financed on a pay-as-you-go basis.	Governments participating in pension plans will disclose the following (this list is not all-inclusive): Description of benefits Name of the plan Description of the benefit provisions, including classes of employees covered Description of contribution requirements Whether a standalone pension plan financial report is available and, if so, how to obtain it Net pension liability information Significant assumptions used in the measurement of the TPL Detailed information about the discount rate (including a sensitivity analysis that shows the effect on the NPL of a one percentage point increase and a one percentage point decrease in the discount rate) Plan’s fiduciary net position information: Elements of the plan’s basic financial statements (or, if available, information on how to obtain the plan’s financial statements and whether same basis is used) Additional information: Employer’s proportionate share (in dollars and percent) of the collective NPL Measurement date of the collective NPL and date of the actuarial valuation used to calculate TPL Description of changes of assumptions, inputs or benefit terms that affected TPL Changes between measurement date of collective NPL and the employer’s reporting date expected to have a significant impact on the employer’s proportionate share of the collective NPL Amount of pension expense recognized during the period Individual components of deferred outflows and deferred inflows of resources Schedule of each of the subsequent five years and in aggregate thereafter, the net amount of deferred outflows and inflows of resources to be recognized in pension expense Amount of revenue recognized for contributions provided by nonemployer contributing entities (special funding situation (SFS)), if any	Cost-sharing employers will present detailed plan information. This will increase comparability of reported pension information.
Required supplementary information (RSI) currently includes a schedule of funding progress and employer contributions for the plan, unless the financial statements of the plan are publicly available. RSI also currently includes a disclosure that the information presented relates to the cost-sharing plan as a whole and provides information to facilitate understanding the scale of the information presented relative to the individual employer.	Governments participating in pension plans will present the following as of the measurement date of the collective NPL (this list is not all-inclusive): 10-year schedule containing the employer’s proportion, in percent of the collective NPL; employer’s proportionate share, in dollars of the collective NPL; employer’s covered-employee payroll; related ratios Governments participating in pension plans will present the following as of the employer’s most recent fiscal year-end (this list is not all-inclusive): If statutorily or contractually established contributions, 10-year schedule presenting required employer contribution; contributions recognized by the plan; difference between required and contributed amounts; employer’s covered-employee payroll; related ratio Other items: Specific RSI is required if the employer has an SFS Notes to the schedules	Cost-sharing employers will present schedules containing information regarding their proportionate share. This will increase the comparability of reported pension information.

Effective Date & Transition

The statement has an effective date of periods beginning after June 15, 2014, for all employers, although early application is encouraged. To the extent practical, accounting changes made to comply with this statement should be reported as adjustments of prior periods; financial statements presented for the affected periods should be restated.

For more on how these changes could affect your organization, contact your BKD advisor. To view or download the statements, visit www.gasb.org.